What’s the difference between an IRA and a Roth IRA?
An IRA stands for individual retirement account. There are two types of IRA's: Traditional IRA’s and Roth IRA’s.
The difference between the two lies primarily in how the accounts are taxed.
Contributions to a Traditional IRA are generally tax deductible in the year the contribution is made, grow tax deferred, and when you take money out in retirement generally you will pay taxes then on those distributions.
Roth IRA’s work the opposite in regards to taxation. There is no tax deduction today, but when you take money out down the road in retirement, your distributions are tax free.
A few other key points: Roth IRA’s have income limits – so if you make over a certain threshold you might not be able to contribute to a Roth. For 2021, as a single filer, that number is $140,000 a year in adjusted gross income, and $208,000 if you file taxes jointly.
Both a Traditional IRA and a Roth IRA also have contribution limits – if you’re under the age of 50 – for 2021 - $6,000 a year is the most you can save into your Roth or traditional IRA. If you have multiple Roth and / or IRA accounts that $6,000 limit is combined between them all.
Tax information is based on the presenter's understanding of current tax laws and does not constitute tax or financial advice. Please consult a qualified professional regarding your individual circumstances